Econ Exam 3.2 April Flashcards
What is the supply curve in perfect competition?
MC = supply curve, except for when MC<AVC because of rule of thumb #2
In perfect competition, what is significant about the long run?
more firms can enter the market
What are the additional long run assumptions?
1) In LR perfect competition, all firms have identical cost curves
2) this industry is a constant cost industry
In LR equilibrium, what will firms earn?
Firms will earn normal profits only, which are incorporated into their costs as opportunity cost
Normal Profits
Have to earn to just stay in business
Where does the price settle in the long run?
Price will settle at the bottom of the ATC
What are the 3 conclusions of perfect competition?
1) consumers receive the lowest price possible
2) firms are as technically efficient as possible (or they won’t survive)
3) the industry is allocatively efficient
When is an industry allocatively efficient?
If they produce a quantity such that the price equals the marginal cost (P=MC)
What does price reflect?
Price reflects the value society places on a good.
What does marginal cost reflect?
Marginal cost reflects the cost to society of using these resources to produce this good, including the opportunity cost
P>MC
value society places on good is greater than cost to make product, results in a shortage because we want more
P<MC
society places a low value on good, firm is making too much
What are the two conditions for a monopoly market?
1) the firm is the single seller of a product
2) this product has no close substitutes
Type 1 Monopoly (simple)
one price, everyone charged same price (ex hormel only producer of canned chili, charge same shelf price)
Type 2 Monopoly (discriminating)
can discriminate in pricing, can charge each customer a different price
